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CH 02 Sols
CH 02 Sols
a. What was the original U.S. dollar value of the Zim dollar? What is the new U.S. dollar value of the Zim dollar?
ANSWER. The U.S. dollar value of the Zim dollar prior to devaluation was $0.0263 (1/38). Subsequent to
devaluation, the Zim dollar was worth $0.02 (1/50).
b. By what percent has the Zim dollar devalued (revalued) relative to the U.S. dollar?
ANSWER. The U.S. dollar value of the Zim dollar has changed by (0.02 - 0.0263)/0.0263 = -24%. Thus, the Zim
dollar has devalued by 24% against the U.S. dollar.
c. By what percent has the U.S. dollar appreciated (depreciated) relative to the Zim dollar?
ANSWER. The U.S. dollar has appreciated against the Zim dollar by an amount equal to (50 - 38)/38 = 31.58%.
a. What was the dollar value of the yen in 1995? What was the yens dollar value in 2000?
ANSWER. The dollar value of the yen in 1995 was $0.0125 (1/80). By 2000, the yen had fallen to $0.00909.
b. By what percent has the yen fallen in value between 1995 and 2000?
ANSWER. Between 1995 and 2000, the yen fell by 27.27%, calculated as (0.00909 - 0.0125)/0.0125.
c. By what percent has the dollar risen in value between 1995 and 2000?
ANSWER. During this same period, the dollar appreciated by 37.5%, calculated as (110 - 80)/80.
a. By how much has the euro appreciated or depreciated against the dollar over this 3-month period?
ANSWER. Since the euro is now worth more in dollar terms, it has appreciated against the dollar. The amount of euro
appreciation is (0.9457 - 0.8984)/0.1984 = 5.27%.
By how much has the dollar appreciated or depreciated against the euro over this period?
ANSWER. The flip side of euro appreciation is dollar depreciation. The dollar has depreciated by an amount equal to
1 1
-
0.9457 0.8984 = 0.8984 - 0.9457 = - 5.00%
1 0.9457
0.8984
4. In early August 2002 (the exact date is a state secret), North Korea reduced the official value of the won from
$0.465 to $0.0067. The black market value of the won at the time was $0.005.
1
CHAPTER 2: THE DETERMINATION OF EXCHANGE RATES
Following the initial devaluation what further percentage devaluation would be necessary for the won to equal its
black market value?
ANSWER. 25.4%
5. On Friday, September 13, 1992, the lira was worth DM 0.0013065. Over the weekend, the lira devalued against
the DM to DM 0.0012613.
ANSWER. Using Equation 2.1, the lira devalued by (0.0012613 - 0.0013065)/0.0013065, or -3.46%.
ANSWER. Using Equation 2.2, the DM appreciated against the lira by [(1/0.0012613) - (1/0.0013065)]/
(1/0.0013065), or 3.58%.
c. Suppose Italy borrowed DM 4 billion, which it sold to prop up the lira. What were the Bank of Italy's lira losses
on this currency intervention?
ANSWER. Prior to devaluation, DM billion was worth Lit (4 billion/0.0013065). Following devaluation, the DM 4
billion borrowing would cost Lit (4 billion/0.0012613) to repay. Hence, the Italian government would lose Lit 4
billion x [(1/0.0012613) - (1/0.0013065)] = Lit 109,716,164344, or DM 138,384,998 at the new exchange rate.
d. Suppose Germany spent DM 24 billion in an attempt to defend the lira. What were the Bundesbank's DM losses
on this currency intervention?
ANSWER. The Bundesbank would have bought Lit 24 billion/0.0013065. Following lira devaluation, these lira
would be worth DM (24 billion/0.0013065) x 0.0012613, or DM 23,169,690,012. The result is a foreign exchange
loss for the Bundesbank of DM 830,309,988 on this currency intervention.
6. At the time Argentina launched its new exchange rate scheme, the euro was trading at $0.85. Exporters and
importers would be able to convert between dollars and pesos at an exchange rate that was an average of the
dollar and the euro exchange rates, that is, P1 = $0.50 0.50.
a. How many pesos would an exporter receive for one dollar under the new system?
ANSWER. Under the new system, P1 = $0.50 + _0.50 = $0.50 + $0.85/2 = $0.925. The peso value of a dollar is thus
1/0.925, or $1 = P1.081. This exchange rate is equivalent to dollar appreciation of 8.1% against the peso.
b. How many dollars would an importer receive for one peso under the new system?
ANSWER. As shown in the answer to Part a, P1 = $0.925. This exchange rate is equivalent to peso devaluation
against the dollar of 7.5%.